Merkel Backs Draghi’s Call for Growth to Combat Debt Crisis

Chancellor Angela Merkel backed European Central Bank President Mario Draghi’s call to focus on spurring economic growth, as German officials rejected charges they are fixated on budget austerity to fight the debt crisis.

Europe needs growth “in the way that Mario Draghi, the president of the European Central Bank, said it today, that is in the form of structural reforms,” Merkel told a conference of her Christian Democratic bloc in Berlin today.

The chancellor was responding to a call by Draghi in Brussels for European leaders to widen their focus from budget cuts and step up their efforts to bolster growth.

“We’ve had a fiscal compact,” Draghi said. “What is most present in my mind now is to have a growth compact.”

Germany, as Europe’s biggest economy, is facing calls from across the region to augment its anti-crisis emphasis as a $1 trillion firewall and unlimited European Central Bank loans fail to stop the turmoil from threatening Spain and Italy.

Germany has always regarded reducing debt along with measures to bolster economic growth as key to winning back financial-market confidence damaged during the debt crisis, Deputy Finance Minister Thomas Steffen said separately today.

“Talking about fiscal discipline does not mean that Germany is, let’s say, more or less a kind of consolidation Taliban,” Steffen said at a Euromoney conference in Berlin. “We do not think it’s all about fiscal consolidation, we very much believe that the euro zone also needs more growth.”

Steffen and Bundesbank board member Andreas Dombret both defended Germany’s insistence that overspending European governments cut their budget deficits.

‘Crisis of Confidence’

“This crisis is a crisis of confidence,” Dombret told the Euromoney event. “While, under normal circumstances, consolidation might damp the economy, the lack of trust in public finances and in policy makers’ willingness to act is a huge burden for growth.”

Steffen said there is no “clear contradiction” between “fiscal consolidation on one hand and growth-enhancing measures on the other.”

French Socialist presidential candidate Francois Hollande said yesterday in an interview with France’s TF1 television that Europe has had “enough” austerity. Hollande, who won the election’s first round, said two days ago that budget austerity across Europe is “bringing desperation to people” and that he’ll refocus the economy on growth if he gets elected.

If governments keep cutting deficits, “negative short-term effects can’t be ruled out,” said Dombret. Even so, “consolidation constitutes necessary corrections of an unsustainable development,” he said. That means “the long-term gains not only vastly exceed potential short-term pain, they also help to alleviate it now by restoring the lost credibility in the ability to tackle the root causes of the crisis.”

Countries “simply have to do their homework” and implement the deficit-cutting steps they have promised, Steffen said. Italy and Spain are doing “great” jobs in carrying out policy measures to get public finances under control. Fiscal consolidation will “set the basis” for new confidence to invest in the region, he said.

Joint bond sales by euro-region governments, a step backed by Hollande, would not “set the right incentives” and would “test the fiscal space” of Germany and other top-rated euro states, Steffen said. Testing the markets and German refinancing capabilities in a fragile situation would be wrong, he said.